Absolute Advantage Definition

4/19/2020 Absolute Advantage Definition
ECONOMICS MACROECONOMICS
Absolute Advantage
By JIM CHAPPELOW | Updated May 1, 2019
What is Absolute Advantage?

Absolute advantage is the ability of an individual, company, region, or country to produce a
greater quantity of a good or service with the same quantity of inputs per unit of time, or to
produce the same quantity of a good or service per unit of time using a lesser quantity of inputs,
than another entity that produces the same good or service. An entity with an absolute
advantage can produce a product or service at a lower absolute cost per unit using a smaller
number of inputs or a more efficient process than another entity producing the same good or
service.
KEY TAKEAWAYS
Absolute advantage is when a producer can produce a good or service in greater
quantity for the same cost, or the same quantity at lower cost, than other producers.
Absolute advantage can be the basis for large gains from trade between producers of
different goods with different absolute advantages.
By specialization, division of labor, and trade, producers with different absolute
advantages can always gain over producing in isolation.
Absolute advantage is related to comparative advantage, which can open up even
more widespread opportunities for the division of labor and gains from trade.
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Basic Concept Of Absolute Advantage
Understanding Absolute Advantage

The concept of absolute advantage was developed by Adam Smith in his book Wealth of
Nations to show how countries can gain from trade by specializing in producing and exporting
the goods that they can produce more efficiently than other countries. Countries with an
absolute advantage can decide to specialize in producing and selling a specific good or service
and use the funds that good or service generates to purchase goods and services from other
countries.
By Smith’s argument, specializing in the products that they each have an absolute advantage in
and then trading products, can make all countries better off, as long as they each have at least
one product for which they hold an absolute advantage over other nations.
General Example of Absolute Advantage

Consider the two hypothetical countries, Atlantica and Krasnovia, with equivalent populations
and resource endowments, which each produce two products, Guns and Bacon. Each year
Atlantica can produce either 12 Guns or 6 slabs of Bacon, while Krasnovia can produce either 6
Guns or 12 slabs of Bacon. Each country needs a minimum of 4 Guns and 4 slabs of Bacon to
survive. In a state of autarky, producing solely on their own for their own needs, Atlantica can
spend ⅓ of the year making Guns and ⅔ making Bacon for a total of 4 Guns and 4 slabs of
Bacon. Krasnovia can spend ⅓ of the year making Bacon and ⅔ making Guns to produce the
same, 4 Guns and 4 slabs of Bacon. This leaves each country at the brink of survival, with barely
enough Guns and Bacon to go around. However, not that Atlantica has an absolute advantage in
producing Guns, and Krasnovia has an absolute advantage in producing Bacon.
Absolute advantage also explains why it makes sense for individuals, businesses and countries
to trade. Since each has advantages in producing certain goods and services, both entities can
benefit from trade.
If each country were to specialize in their absolute advantage, Atlantica could make 12 Guns
and no Bacon, while Krasnovia makes no Guns and 12 slabs of Bacon. By specializing, the two
countries divide the tasks of their labor between them. If they then trade 6 Guns for 6 slabs of
Bacon, each country would then have 6 of each. Both countries would now be better off than
before, because each would have 6 Guns and 6 Bacon, as opposed to 4 of each good which they
could produce on their own.
This mutual gain from trade forms the basis of Adam Smith’s argument that specialization, the
division of labor, and subsequent trade leads to an overall increase of wealth from which all can
benefit. This, Smith believed, was the root cause of the eponymous Wealth of Nations.
Absolute Advantage and Comparative Advantage

Absolute advantage can be contrasted to comparative advantage, which is when a producer has
a lower opportunity cost to produce a good or service than another producer. Absolute
advantage leads to unambiguous gains from specialization and trade only in cases where each
producer has an absolute advantage in producing some good. If a producer lacks any absolute
advantage then Adam Smith’s argument would not necessarily apply. However, the producer
and its trading partners might still be able to realized gains from trade if they can specialize
based on their respective comparative advantages instead.
Related Terms
What the Production Possibility Frontier (PPF) Curve Shows
The production possibility frontier (PPF) is a curve that is used to discover the mix of products that will
use available resources most efficiently. more
Why Comparative Advantage Matters

Comparative advantage refers to an economy's ability to produce goods and services at a lower
opportunity cost than trade partners. more
What Is Trade?
A basic economic concept that involves multiple parties participating in the voluntary negotiation. more
Autarky Definition
Autarky refers to a nation or entity that is self-sufficient, or an economic system of self-sufficiency and
limited trade. more
Closed Economies and Why They Don't Really Exist

A closed economy is considered self-sufficient with no interest in engaging in international trade with
outside countries. more
Inflation
Inflation is a general increase in the prices of goods and services in an economy over some period of
time. more
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4/19/2020 Absolute Advantage Definition

What is Absolute Advantage?

Basic Concept Of Absolute Advantage

Understanding Absolute Advantage

General Example of Absolute Advantage

Absolute Advantage and Comparative Advantage

Why Comparative Advantage Matters

Closed Economies and Why They Don't Really Exist

OPTIONS & DERIVATIVES TRADING

Editorial Policy Contact Us

Privacy Policy Dictionary

California Privacy Notice News

Terms of Use Careers

Investopedia is part of the Dotdash publishing family.

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